Let me start by grabbing your attention :
In 2016, you would be having Brad Pitt, Christian Bale, Ryan Gosling, Karen Gillan and Steve Carell starring in a film by the same name in theatres near you.
Now back to business
The happenings in the US Real estate markets in 2007-08 were not extraordinary. Rather, the event marked a tipping point and return to sanity. Michael Lewis, the famous author of this bestseller, brings forth a simple and hilarious commentary on the sub-prime crisis massacre in the United States of America eight years back.
Michael starts with a reflection on how he wanted “Liar’s Poker” (describing his experiences as a bond trader at Salomon Brothers) to be perceived – as an advise to students to do something more meaningful than making trades on Wall Street, and expresses his worry on it being made “a handbook” for surviving there.
He then starts with the gripping tale of “The Big Short” describing how a few who saw through the maze of greed and leverage were able to rake in billions of dollars by going short the real-estate bubble.
You ask what made this bubble possible?
Answer is the overdrive on which “clever” bankers and hedge fund managers went for financing the home loan requirements of an entire nation.
The catastrophic end resulted into losses amounting to more than a trillion dollars (half the size of India’s GDP), and millions of homeless people. The book traces the origins of the popular US bond market to 1980’s. Under the lens of then Salomon Brothers’ Partners, the bond markets spread its wings. Though the firm (later corporatized) was infamously taken over by Citigroup in 2003, the world was yet to witness the destruction by its “bond invention”.
Story behind the Crisis –
The book makes you understand the very base of the crisis – how celebrated bankers such as Goldman Sachs, Morgan Stanley, Deutsche Bank, Citi, UBS and JP Morgan lent hundreds of billions of dollars to individuals with almost no income and asset proofs. The bankers were unrealistically bullish over property, which further made them repackage these loans and sell them as mortgage backed securities (bonds). These bonds essentially had nothing but overvalued property as their underlying. As property fever rose, so did the bonds in value and quantity from 2005 and 2008. The money from these bonds was then further lent to more NINA (No Income, No Assets) individuals fuelling an ever-rising real estate market from 2003 till its eventual bust in 2008. What more, Michael strikingly points out the absolute foolishness of rating agencies like Meryl Lynch, Moody’s and US Govt’s S&P to rate these high-risk, sure to default bonds as triple-A (representing the highest possible quality rating for any asset).
To put things in perspective, until then only US Treasuries (i.e. bonds of the US Govt., and backed by them), and corporate loans of high income organisations were entitled to this certification. And now, these agencies were giving a triple-A certification on the repayment ability of a stripper in Las Vegas (who had procured a second mortgage on her house) and even a strawberry picker from Mexico (taking three-fourth of a million dollars with an annual income of USD 15,000) among their likes.
An insight to the whole crisis
While financial world came crashing down, there were still a few sane financiers left, who made well deserved fortunes for holding contrarian views. The author, makes you go through the events from the point of view of Steve Eisman, founder FrontPoint Partners LLC; one eyed Michael Burry, founder of the Scion Capital LLC and the founder trio of Cornwall Capital among few others who held their nerves when the whole of world was going crazy.
The author expresses shock and humour on the lack of understanding of top banks and insurance executives about the complex financial instruments which they were responsible for creating. Further surprising is the positions undertaken by AIG (American Insurance Group), selling CDS (Credit Default Swaps – an instrument of betting against the system) and CDOs (Collateral debt obligations- the terms were murkier to well hide – the murkiness). The further bailouts of the banks and insurance companies by the Govt. with tax payers’ money makes for an interesting chapter.
Michael Lewis, in his usual fashion makes “The Big Short” nothing less than a thriller, involving money, brain games and institutions. It highlights the philosophy to “Privatise the gains and socialise the losses”.